Impound Account

What is an Impound Account?

An impound account, often referred to as an escrow account, is a special type of account established by a mortgage lender for the purpose of collecting and holding funds to pay property taxes, homeowner’s insurance, and other property-related expenses on behalf of the borrower. This account helps ensure that these mandatory expenses are paid on time, reducing the risk of default by the borrower and protecting the investment of both the lender and the homeowner.

Examples of Impound Accounts

1. Home Purchase with FHA Loan:

   • A borrower obtains an FHA loan to purchase a new home. The lender establishes an impound account to collect monthly payments for property taxes, homeowner’s insurance, and mortgage insurance premiums along with the mortgage payments. The funds in the impound account are then used to pay these expenses when they become due.

2. Refinancing a Mortgage:

   • During the refinancing process, a homeowner agrees to have an impound account set up by the new lender. The homeowner continues to make monthly payments that include contributions to the impound account, ensuring that taxes and insurance will be paid automatically.

Frequently Asked Questions (FAQs)

Q1: Do I have to have an impound account?

• A1: Not always. Some lenders may require an impound account as a condition of the loan, especially for FHA and VA loans. Conventional loans may have more flexibility, but it generally depends on the lender’s policies and your loan-to-value ratio.

Q2: Can I cancel my impound account?

• A2: Depending on the lender, you may be able to cancel your impound account after reaching a certain equity threshold in your home, typically 20%. However, this may also depend on your payment history and the specific terms of your mortgage agreement.

Q3: How are the amounts calculated for an impound account?

• A3: The amounts are calculated based on your annual property tax and insurance premiums, divided by 12 to determine the monthly contributions. Lenders may also add a cushion amount to the account to cover any increases or unexpected costs.

Q4: What happens if there’s a shortage in the impound account?

• A4: If there’s a shortage, your lender may notify you of the shortfall and may increase your monthly payments to make up the difference or require you to make a lump-sum payment.

Q5: Can an impound account earn interest?

• A5: It depends on state laws and lender policies. Some states require that impound accounts earn interest, while others do not.

Related Terms

• Escrow Account: An account held by a third party (escrow agent) to manage the disbursement of funds during a real estate transaction. In mortgage lending, it’s also referred to as an impound account.
• Property Tax: A tax on real estate, usually assessed by local governments, based on the value of the property.
• Homeowner’s Insurance: An insurance policy that protects homeowners against damages to their home and possessions within, as well as liability for accidents that may happen on their property.
• Mortgage Lender: A financial institution or bank that provides money for the purchase of real estate.

Online Resources

• CFPB - Consumer Financial Protection Bureau
• FHA - Federal Housing Administration
• VA Home Loans
• IRS - Internal Revenue Service
• Bankrate

References

1. Consumer Financial Protection Bureau. “What Is an Escrow or Impound Account?” CFPB.
2. U.S. Department of Housing and Urban Development. “FHA Single Family Housing Policy Handbook.” HUD Handbook.

Suggested Books

• “Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan” by David Reed
• “The Real Estate Wholesaling Bible: The Fastest, Easiest Way to Get Started in Real Estate Investing” by Than Merrill
• “Your Score: An Insider’s Secrets to Understanding, Controlling, and Protecting Your Credit Score” by Anthony Davenport

Real Estate Basics: Impound Account Fundamentals Quiz